IFRS 3: BUSINESS COMBINATION and ACQUISITION METHOD Flashcards
How an acquirer account for a business combination?
An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enable users to evaluate the nature and financial effects of the acquisition
Which are the steps to recognise a business combination?
Step 1 – Is it a business combination?
Step 2 - Identify the acquirer
Step 3 - Identify the point at which control gained
Step 4 – Measure consideration at date control passes (amount paid for take control of the business)
Step 5 – Identify assets and liabilities acquired
Step 6 – Allocate purchase price to assets and liabilities acquired
Step 7 – Determine goodwill or bargain purchase price
What is the scope of IFRS 3 (Business combination)?
IFRS 3 applies to transactions and events that meet the definition of a business combination.
The simple purchase of assete and/or liabilities don’t constitute a business combination.
What is a business combination?
A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses.
- A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participant;
- Control of an investee is obtained when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
Differences in account between a business combination and asset acquisition
Business Combination - Asset acquired
Net Asset: FV - Cost
Goodwill: Yes - No
Deferred Tax: Yes - Initial recognition exemption
Acquisition Costs: Expense - Capitalize
Share based payments: FV shares - FV asset acquired
Deferred consideration (IAS 39): in scope- not in scope automatically
How to determine the acquisition date?
The acquisition date is the date the acquirer obtains control of the acquiree.
Acquisition date is usually when the acquiree legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree – the closing date.
Control may be obtained earlier or later than closing date
Control of an investee is obtained when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
ACCOUNTING: Consolidate from the date when control is achieved.
Following the “Recognition Principle”, what the acquirer shall recognise at the acquisition date?
- The identifiable assets acquired
- The liabilities assumed
- Any non-controlling interest in the acquiree
- Goodwill is recognised separately
Conditions apply
What are the “Recognition Conditions” of Intangible Assets?
Recognized separately from goodwill when either separable or contractual-legal criterion met:
- Where contractual-legal criterion met, identifiable even if asset not transferable or separable from the acquiree or other rights and obligations
- Separable criterion met where intangible asset is capable of being separated or divided from the acquiree and sold, transferred, licensed, etc.
Any intangible asset not meeting contractual-legal criterion or separable criterion included within goodwill
Intangible assets with a finite life amortised over remaining life, intangible assets with indefinite life to be tested for impairment
Subsequent accounting in accordance with IAS 38 Intangible Assets
Workforce, potential contracts, and potential expansions of the existing customer base are NOT identifiable as intangible assets.
General measurement principle to measure the NET ASSETS ACQUIRED
The acquirer shall measure the identifiable assets acquired and liabilities assumed at their acquisition date fair values
What is an exception to the recognition principle when measuring net assets acquired?
IAS 37 ‘Provisions, Contingent liabilities and Contingent assets’ requirements do not apply
How to account for CONTINGENT LIABILITIES?
Recognize if it is a present obligation as a result of a past event and the fair value can be measured reliably.
After initial recognition, and until liability is settled, cancelled or expired it is measured at higher of:
– amount recognized under IAS 37, or
– amount initially recorded less any required amortization
What are Exceptions to both the recognition and measurement principles when measuring net assets acquired?
Income taxes
– Accounted for in accordance with IAS 12, not FV
Previously unrecognized DTAs on losses carried forward may be recognised
**Goodwill **
– DTL not recognized
How the entity account for the unused tax losses of the subsidiary?
a) If the entity think that the tax losses could be utilised by the group at the acquisition date:
DR Deferred tax asset
CR Goodwill
b) If the entity assessed that the circumstances in which the tax losses could be utilised by the group became probable after the acquisition date:
DR Deferred tax asset
CR Tax income
How to recognise and measure NON-CONTROLLING INTEREST?
Non-controlling interest is the equity of a subsidiary not attributable, either directly or indirectly, to a parent
Choice of accounting on a combination by combination basis:
‐ Fair value
(Goodwill = Consideration + FV of NCI - FV of assets acquired)
‐ Proportionate share method
(Goodwill = Consideration - FV of asset acquired
Journal Entry in both case:
DR Net assets
DR Goodwill
CR Consideration
CR NCI
